How can independent hydro generators maximise revenues from their PPA?

Blog

Posted on: 21/06/2017

Presenting at the recent Scottish Renewables Hydro Conference, Business Development Manager Stephen McInally explores the growing opportunities for small-scale independent generators in the PPA market.

The renewables industry has been hit hard with subsidy cuts. With much uncertainty around the potential changes to embedded benefits, cuts to the Feed-in Tariff scheme, and the end of the Renewables Obligation.

We’ve seen the rate of independent generation growth slow considerably, especially in the last year - as reported in our latest Energy Entrepreneurs Report (available to download here).

However, with ambitious targets set out by the UK Government to cut emissions by 57% by 2030 based on 1990 levels, renewable energy will have a vital role to play.

There are innovative opportunities in both the wholesale and the ancillary market to support generators in adapting to a world of declining subsidies and getting more value from their smaller-scale projects as the market becomes more flexible.

Currently most small scale generators are on short-term fixed Power Purchase Agreement (PPA) contracts, setting prices at the start of the contract with very low risk, but there are other route-to-market options available to maximise project revenues:

1. Framework structure for multiple price fixes

Typically, a framework contract structure would be over a period of 4-5 years and provides long-term access to the wholesale market. Generators can take a fixed price for their outputs for as little as one month ahead, allowing them to follow market trends and sell their power when the wholesale market is in their favour.

2. Flexible structure to sell power in multiple hedges

A flexible PPA allows generators to respond to market movements as they happen - hydro projects with pumps, reservoirs or storage are able to really maximise on a flexible contract. The sale decisions are split over multiple blocks of power across multiple transactions.

This allows the generator to secure greater visibility and understanding of future earnings by hedging in advance, but requires knowledge and monitoring of the wholesale market.

3. Outsource the selling of your power to trading experts

With a flexible contract discussed above, this requires a level of in-house expertise which is not feasible for many generators. An increasingly popular alternative is a contract which outsources hedging decisions to an experienced PPA provider.

The power would be hedged throughout the contract term based on pre-defined triggers, with the ability to extend the hedging horizon out for a longer period and spread market risk.

This PPA option would ensure the generator’s income is more market-reflective without the need for them to closely monitor the market themselves. Aggregation opportunities would make this a viable option for small-scale hydro, for example ten 500kW projects could combine to create one 5MW managed PPA.